in the middle of last year Seth kimman gave an interview talking about the everything bubble he spoke about how money was simply flooding into everything from stocks to crypto to specs and everything was getting seriously expensive we've been in an everything bubble I think that um a lot of money has flowed into virtually everything Seth is no media personality he's not a stock market predictor in fact he is an incredibly quiet value investor that rarely talks to the media you are um somebody who shies away from publicity I've been trying to get you to come
on the show for years but interestingly he is one of the few people that Warren Buffett himself has said could reliably beat the market over time he's also the author of margin of safety he's worth about $1.3 billion he knows what he's on about but the interesting thing is that in the last year since he gave that interview look at what's happened the everything bubble has only gotten worse the S&P the Dow the NASDAQ midcap small cap micro cap doesn't matter you're up around 30% in some cases more literally all sectors with the ction of
energy good you're basically Warren Buffett World equities emerging markets the rest of the world excluding the US developed markets Europe australasia and the Far East all amazing silver gold Platinum good good good Bitcoin and ethereum amazing bond yields amazing you get the point since Seth kimman warned us about the everything bubble last year the bubble has only gotten bigger there have been times in my life that I've been a wash in so many opportunities that I could have invested everything by Nightfall but but now we haven't seen anything that makes sense so what do we
do well let's talk about it and before we do I just want to say a big thank you to Seeking Alpha for sponsoring this video you're going to see it right the way through the video but seeking out for premium is very overpowered for investors like myself I use it all the time if you want to try it for free for 7 days and get a $30 discount on their annual premium subscription please use my link in the description and the pinned comment in my opinion it is the subscription to get if you're into stocks
and yes I would absolutely still be recommending it even if they supporting the channel but to start this video I want to show you guys exactly how expensive the market is getting and you'll start to see the problems I'm running into as an investor at the moment you guys know that I love looking into businesses from the Warren Buffett Viewpoint so solid businesses fair prices but have a look at this I won't spend long on this because I've quoted in a few recent videos now but take a look at this number which is the schilla
PE Ratio this is a big price to earnings ratio for the S&P 500 but it takes the average inflation adjusted earnings over the past 10 years years so it's quite conservative now usually the market sits at around 18 to 20ish that's the long-term historical average investors will pay 18 to 20 times the earnings of the S&P 500 as a price but today however well we're looking at a monstrous Schiller P value of 37 now I want to be clear that doesn't mean the stock market is going to crash it doesn't mean you should sell now
it isn't anything except a reference point to history but yes as you can see the last few times it was this high was 20 20212 1929 with each of those moments corresponding to periods of serious Market overvaluation looking to something like the fear and greed index we can see that 12 months ago people were fearful but now that has completely reversed not really bad just yet but investors are feeling a little bit greedy and that causes some problems for investors so I want to talk to you guys about a ratio that I use it's called
the Enterprise Value to free cash flow free cash flow is an easy one is simply the amount of cash a business makes in a certain time period minus the amount of cash the business spends on Capital expenditures to keep the business humming so it's the cash flow left over at the end of the year and then Enterprise Value is the market value of a company so the market cap but it also considers the fact that as the owner of the business you would also inherit the cash on the books and you'd inherit the debt the
company has to so the formula is simply market cap plus net debt with net debt being total debt minus cash Enterprise Value is kind of like a more comprehensive value of a business to use in your valuation now value investors love a low Enterprise Value to free cash flow multiple if you can buy the company at a price that's say eight times the free cash flow that means we've made back that investment in only 8 years ratio in the 20s or the 30s however it kind of sucks because it means we're going to have to
wait a long time before we've recouped our investment now let's pick a notable high quality business in the S&P 500 say Google it's just a random one they're super profitable and they're even in my portfolio now if I type in Google and go over to their Enterprise Value we can see that their value is around $2 trillion now if I go over to the cash flow statement I can see that in the last 12 months they generated free cash flow of$ 44.2 billion yeah they make a lot of cash but as a ratio it comes
out to 44 so investors need 44 years worth of free cash flow before they can recoup their investment and that kind of sucks but now take a look at this this is the results for the 10 largest companies in the S&P 500 which at the time of recording hold 36% of the S&P 500 weight again all this data came from Seeking Alpha I've just gone the extra step to actually put it in this table but have a look at the Enterprise Value to free cash flow ratios the only one even remotely in the ballpark as
expected is Warren Buffett's Berkshire hathway the rest have just been bit up to the Moon investors are willing to pay 30 40 and in the case of Nvidia nearly a 100 times free cash flow just to own the shares now this is very abnormal it's likely not as Extreme as you get into the smaller less scrutinized stocks of the S&P 500 but the point stands the stock market is pretty darn expensive so what on Earth can investors do how do you get around the everything bubble that just keeps getting bigger well I think it comes
down to two things you either accept that active investing in the US is probably not going to work all that well at the current time and instead you just keep going with your passive investing into ETFs as per usual and you just call it a day or if you feel compelled to continue that Warren buffer investing strategy you have to do what the Great Value investors of the world are doing right now and you have to broaden your horizons and I was talking about this in a relatively recent video if you look at the big
long list of super investors a lot of them have been making recent Investments not in America but instead in international markets China has been a big one for investors like monish bar guy Spear Michael Bar Howard Marx and the late Charlie Munga probably the most debated stock out of the lot has been Alibaba but you can't argue with the valuation turning back to Seeking Alpha they have an Enterprise value of around 220 billion and free cash flow across the last 12 months of 20.3 billion that's not an Enterprise Value to free cash flow ratio of
30 or 40 or 50 in fact it's just 11 Alibaba in my perspective is one of the cheapest large companies that exists in the world and I went through this process again for each of the biggest Chinese tech stocks as well so you know I'm not picking an outline and have a look 10 cent at 22 pinoo at 82 xami a little bit higher at 24 JD at 11 net e at 12 Buu at just 6 and A2 that's more like it right or we can look at Warren Buffett for example one of his largest
Investments across the last few years has not been in Microsoft or Nvidia or even Apple but instead in five Japanese trading houses I just thought these were big companies there were companies that I generally understood what they did and they were selling it what I thought was r a ridiculous price I was confounded by the fact that we could buy into these companies and in effect having an earnings yield maybe 14% or something like that with dividends that would grow they actually grew 70% during that time and people were investing their money at a quarter
of a percent or nothing and that quarter percent if they put it out for many years wasn't going to grow and the 14% was more likely to grow than that if that does look like something sensible me you know that's as easy G now he bought these companies back in 2020 and while I don't have the Enterprise Value to free cash flow data from around that time even just looking back at their historical market caps to calculate a simple price to- free cash flow you can see a similar story when he bought into these five
companies they weren't trading at multiples of 30 40 50 Etc they were Max 21 with the others being 8 10 and 14 so when you're talking about the everything bubble yes in America it very much is but if you're game enough to venture out and look at other markets I think there are still some opportunities we know monish P has been investing more and more in India and turkey over the last few years in fact I'm actually going on an investment tour with Matt Peterson to scope out some Turkish businesses in a few weeks from
now I'm very excited about that so definitely looking to other markets is one strategy but I think another thing I wanted to talk about in this video is that it's okay to have a period of time where you're not investing so much we spoke about Warren Buffett before I just made a video the other week talking about how he is very open and honest about the fact that he's not really finding any good opportunities at the current time and instead he feels comfortable increasing burshire Hathway's cash position but I don't mind at all under current
conditions building the uh cash position I think uh when I look at the alternative of what's available in the equity markets and I look at the composition of what's going on or we find it quite attractive and we know that's not a super punishing strategy at the moment because you can do as Warren does with Berkshire and simply hold short-term US Treasury bonds the yield on 3month treasuries at the moment is around 45% so you're being paid reasonably handsomely for doing nothing with your cash would he put new money into that gets over that hurdle
of 5% 5.4% yeah you got to get more than 5% that you can earn in treasuries in a very safe environment and while I don't want to make any sort of predictions the global economy is pretty tense right now so if something were to go bang figuratively hopefully not literally well if that's the case then you're in a good position to take advantage if you do have a little bit of cash on the sidelines remember Warren in his 2016 shareholder letter said every decade or so dark clouds will fill the economic skies and they will
briefly rain gold when downpours of that sort occur it's imperative that we rush Outdoors carrying wash tubs not teaspoons so a little bit of cash never hurts right also finally I did just want to say thanks again to Seeking Alpha for sponsoring this video as a reminder you can try seeking out for premium for free for 7 days and score $30 off an annual subscription all by using the referral link but guys with that said that is the everything bubble Revisited plus what the world's best investors are currently doing about it so overall please leave
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